Appeals Court Kills Universal’s Lawsuit Over Re-Selling Promo CDs

An appeals court confirmed today that consumers have a right to re-sell promotional CDs, which could have implications for other copyrighted goods as well. A panel of judges from the U.S. Court of Appeals for the 9th Circuit has now ruled in three landmark cases that relate to whether copyrighted items like software and CDs are sold-and thus, out of the copyright owner’s control-or simply “licensed” to consumers.

In the case decided today, Los Angeles music re-seller Troy Augusto was in a copyright duel with Universal Music Group. Augusto makes his living buying and re-selling music, including the promo CDs sometimes issued by record labels such as Universal that are marked “for promotional use only.” Universal sued Augusto and his company back in 2007, arguing that anyone distributing those CD’s without its permission was violating its copyright.

Not so, ruled a U.S. District Court in Los Angeles, which held in 2008 that just because Universal said it retains ownership of the compact discs doesn’t mean it actually does. UMG’s handing out of the promo CDs had all the aspects of a gift-the record label never required the return of the CDs, and didn’t impose any conditions with distribution.

UMG engaged in a lengthy appeal to keep control of those promo CDs, which today it finally lost. Now that the 9th Circuit has ruled on the case, it’s binding on all judges throughout the circuit, which covers most of the Western U.S. UMG’s only other option is to ask for a re-hearing of the whole 9th Circuit or appeal to the U.S. Supreme Court-and either option would be an extreme longshot in this case.

Joe Gratz of the Durie Tangri law firm, who worked together with the Elecronic Frontier Foundation digital-rights group to represent Augusto, said: “The Ninth Circuit recognized an important principle: that you can’t eliminate consumers’ rights just by claiming there’s a ‘license agreement.’ Once a copyrighted work is freely given, the copyright holder isn’t in charge anymore. The copyright owner can’t stop you from selling it or lending it to a friend.”

Universal Music Group didn’t immediately respond to a request for comment.

A key piece of case law in the Augusto case was the Supreme Court’s 1908 Bobbs-Merrill v. Straus case, in which a book publisher slapped a notice on the inside of a book insisting that any sale of the book for less than $1 would constitute a copyright violation. Department store R.H. Macy & Co. went ahead and sold the book for 89 cents anyhow, and was ultimately vindicated at the high court.

Augusto’s case was part of a group of three copyright cases taken by this 9th Circuit panel that all dealt with the sometimes blurry line between when copyrighted goods are “owned” and when they are “licensed.” The potentially widest-ranging of the three cases, Vernor v. Autodesk, had a very different outcome than the Augusto case. In that case, the same panel of judges ruled that Autodesk’s sale of software to its customers isn’t a sale at all-it actually constitutes a license, as Autodesk had argued, and it cannot be re-sold without violating copyright law. The final case of the triumvirate, MDY v. Blizzard, had mixed results.

While Augusto’s victory confirms that copyright owners can’t simply call a sale or gift a “license” and have it be so, it is balanced out by Autodesk’s earlier win over Vernor, which will uphold most types of licensing for software. That means that for a variety of digital goods, copyright owners will have a strong legal argument that consumers have licensed, not purchased, their content.

One key difference between the (now invalid) promo CD licenses and the (still valid) software licenses: unlike software vendors, UMG didn’t have any evidence that the DJs and reviewers it sent promo CDs out to ever agreed to the supposed license.

The different rulings in these landmark cases could lead to a situation where consumers have strong protections for their rights to use physical copyrighted goods in any manner they choose, but fewer rights when it comes to digital goods.